Author Topic: Report on Irish Banking Failures  (Read 267 times)

John Short

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Report on Irish Banking Failures
« on: April 20, 2011, 13:25:05 GMT »
http://finance.gov.ie/documents/publications/reports/2011/nybergreport.pdf

“Why did so many professionally adept Irish bankers and public servants (as well as politicians, entrepreneurs, experts, media and households) simultaneously come to make assessments and decisions that have later proven seriously unsound in a number of ways?” para 1.4.1  The Nyberg Report set out the answers and concludes
“The Commission has reluctantly come to the conclusion that at least some of the financial market professionals at the time must have entertained private, undisclosed doubts on the sustainability of banks’ lending and funding policies. However, for various reasons “the dance had to go on”. Similarly, it seems likely that the public and private watchdogs remained less active than required, not only because they did not know, but also because it was not publicly acceptable, legally necessary or prudent to act at the time.
During much of the Period, Ireland was still seen as a success story that provided a large number of its inhabitants with self-esteem as well as rising incomes, wealth and welfare. Anybody seriously interfering with this process would expect to be publicly castigated as causing the very distress, loss and crisis that they would have been trying to prevent. Instead, by allowing the party and deal-making to continue, management, investors and public and private watchdogs participated in its positive but temporary gifts.
That said, the Commission is not suggesting that financial professionals in Ireland consciously decided to let banks get into trouble. As indicated earlier, it is much more likely that professional suspicions were explained away or suppressed, in light of the new financial dogma and a long period of good times, in order not to appear fractious, unprofessional or alarmist among colleagues, superiors and others who were believed to possess equal or even superior knowledge.”
The report looks at the findings with respect to the Authorities Financial Regulator, Central Bank and Department of Finance which are reproduced below.

The word politician appears only twice in the report – once in the paragraph above.

5.3 Findings - Authorities

5.3.1 The speed and severity of the crisis was exacerbated by world-wide economic events. The main reason, however, was the unhindered expansion of the property bubble financed by the banks using wholesale market funding. government policies and pronouncements tended to support this expansion. The attendant risks went undetected or were at least seriously misjudged by the authorities whose actions and warnings were modest and insufficient.
5.3.2 The Irish authorities had the data required to arouse suspicion about trends in the property and financial markets. The relaxed attitude of the authorities was therefore the result of either a failure to understand the data or not being able to evaluate and analyse the implications correctly. Both macroeconomic and banking data could, particularly when combined, have provided the authorities with an understanding of what was going on. The Financial Stability Reports (FSR) provided information on individual perceived risks but, in the Commission’s view, the data should have raised greater suspicions by end-2005 or, at the latest, by 2006.
The Financial Regulator
5.3.3 Provided the appropriate structures and processes were in place, the FR’s approach was to trust bank leadership to make proper and prudent decisions. However, even when problems were identified and remarked upon, the FR did not subsequently ensure that sufficient corrective action was taken. Thus, even insightful and critical investigation reports tended to have little impact on banking practices. Furthermore, readily available information on, for instance, sector or borrower concentrations was not sufficiently critically analysed by the FR. Even if it were accepted that the FR was significantly under-resourced throughout the Period, this would not explain why available information was not acted upon.
5.3.4 It seems remarkable that the FR in practice accepted the severe governance problems in INBS. Allowing this bank to continue operations without major reforms or sanctions must, on the part of the FR, have reflected either a reluctance to pursue legal action or a profound trust in bank management and the board. Similarly, the rapid and concentrated lending growth in Anglo, and later in other banks, did not lead to regulatory action, with reliance being placed on management assurances that all was basically well. The FR continued to accept theseassurances, even after the Guarantee decision in late 2008.
5.3.5 The Commission is aware of the view that the FR did not have sufficient powers to intervene.
This view is not persuasive given that the FR could have acted in concert with the Central Bank (CB) and, ideally though perhaps unrealistically, with Government support. The real problem was not lack of powers but lack of scepticism and the appetite to prosecute challenges.
The Central Bank
5.3.6 The CB chose to rely on the FR appropriately handling individual bank stability issues, much as the FR in turn chose to trust bank leadership. By implication, unless there were problems in the individual banks, there could not be major stability issues in the system as a whole. The Financial Stability Report (FSR) was constrained to present benign conclusions with a number of almost routine warnings voiced in the text itself. Simultaneously, macro-economic data signalling the emergence of the two key risks – growing dependence on foreign funding and the concentration of bank lending in the property sector – did not appear to have caused acute concern.
5.3.7 At least at policy level, the CB seems not to have sufficiently appreciated the possibility that, while each bank was following a strategy that made sense, in the aggregate, when followed by all banks, this strategy could have serious consequences for overall financial stability. This was a classic macroeconomic fallacy that must have been recognised in the CB and it remains unclear why it was not appreciated at senior levels there. However, there are signs that a hierarchical culture, with elements of self-censorship at various levels, developed in the CB. Of course, this eventually made it even harder to address the increasing instabilities in the financial market.
5.3.8 The Commission is aware of but disagrees with the view that the CB would not have been entitled to intervene to address stability issues concerning individual banks. If the CB management had identified or given sufficient weight to macro-economic vulnerabilities, it could and should have initiated discussions with the FR to ensure a deeper analysis of individual banks’ regulatory returns. However, as neither institution suspected any significant problems this does not appear to have been done.
The Department of Finance
5.3.9 The Department of Finance (DoF) did not, despite its mandate, see itself as concretely involved in financial stability issues; it also did not have the requisite professional staff for this. There were regular formal contacts with the FR (via the approval process for its budget) and somewhat more frequently with the CB, both in practice responsible for operational stability assessments. The DoF saw itself as preparing legislation to be implemented by the other authorities, but appears to have avoided addressing other financial market issues unless brought to the table by the FR or the CB (for instance, Credit Union issues during the Period). This apparently was due to their legally independent status. The Commission could find no evidence that the DoF formally tried to influence the FR in its work. The DoF also did not make any efforts to strengthen its own financial market expertise despite crisis management exercises in the EU having shown a need for it among finance ministries.
5.3.10 Had the DoF taken a greater interest in financial market issues early on, preparations for dealing with the financial crisis would have been more comprehensive. It is well documented that the DoF consistently, though not forcefully enough, supported a less expansive fiscal policy, particularly regarding property market incentives. It also appears that worries about the developing financial situation were expressed internally from time to time by some DoF staff. However, nothing came of this as the CB and FR were seen as responsible for financial stability.


petagny

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Re: Report on Irish Banking Failures
« Reply #1 on: April 20, 2011, 15:15:12 GMT »
All sounds vaguely familiar...

'Even in such a time of madness as the late twenties, a great many men in Wall Street remained quite sane. But they also remained very quiet. The sense of responsibility in the financial community for the community as a whole is not small. It is nearly nil. Perhaps this is inherent. In a community where the primary concern is making money, one of the necessary rules is to live and let live. To speak out against madness may be to ruin those who have succumbed to it. So the wise in Wall Street are nearly always silent. The foolish thus have the field to themselves. None rebukes them.' The Great Crash 1929, J.K. Galbraith, 1955

N.B. Accuracy of this quote not verified - taken off the web.

 

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